Lateral Market...Negative Divergences Abound...
Wouldn't it be nice if the stock market would actually do something! Lateral has been the way for quite some time now. Lots of head fakes both ways but when you study things, the past month or so has seen the market grind up and down due to opposing forces from both the bullish side and the bearish side of the ledger. The bulls can talk quite a bit about what's being reported from our Government. I'm not saying they're reporting the absolute truth. I'm just saying what's being reported. Most of the economic news is favorable these days. It tells us the worst of things has passed on by. Has it? I am not so sure but that's their suggestion. The market is buying it for now. The bulls can also claim that earnings are coming in better than expected. Are they really? Well, I am not so sure since many, not all, but many of the better reports are due to cost cutting. How do we know? Earnings are beating in many cases by a huge amount yet revenues are only in line or in many cases, even a drop below. Cutting costs by cutting jobs and or job hours. Not exactly a pillar of health but hey, for now the market doesn't care and that's all we care about when playing this silly game. So earnings and economic news are clearly on the side of the bulls. On the side of the bears we have overbought daily charts in conjunction with massive consecutive negative divergences on the those same charts. A very ugly combination. We also have massive price resistance just above on those trend lines you'll see in the charts in this report. You also have a high number of stocks on a high pole that need to pull back. Their moves very mature meaning any upside from here is labored at best. It can occur but won't be easy by an means. Stocks on high poles with negative divergences and overbought can be a real headache for the bulls thus expecting much upside near term isn't wise. So the bulls have some advantages and you can see the bears do as well. It all equates to a market that has moved laterally for the last month plus and we all know lateral market are absolutely no fun. Until this lateral market makes the move over key resistance or Sp 1101 on a closing basis or below key support or Sp 1074 on a closing basis, you can expect much of the same lateral boredom.
With the 20 day exponential moving average at 1074 and with the gap bottom at 1075 you can understand why it is very difficult for you bears to get much satisfaction. A strong confluence of support that gets the bulls very excited we get near there. The bulls have had a fun seven months and keep looking for entry. Whenever we get down to key support, especially when it's a confluence of support, meaning supported by a close proximity of price, the bulls buy away. It doesn't mean we won't break below at some point very soon, it just means this is why it has been so hard for the bears to get that warm feeling only a collapsing market can give them. They get excited only to see that excitement washed away. They get so close yet can not break the will of the bulls. With many red flags abounding I do believe they have more than a reasonable shot at taking out 1074 before the bulls can take away 1101 but we need to see the move first. What they need is a strong gap down below 1074 that runs. It's mush harder to get a move through important support without gapping below it. If you gap and run, then the bulls will back off the gas allowing the bears to seize the moment. I don't want the bears to think it can't happen on an intra day move for it can, it's just that a gap is far easier since the bulls are trying to defend so viciously when we move lower but haven't taken key support out. If we lose 1074, there is next support at yet another gap at 1060. This is yet another headache for the bears. The market, on this climb up, has had many gap ups along the way thus each gap below will be a test for the bears when trying to break prices down.
The financial sector along with the technology sector have some of the heaviest weighted stocks thus the bears need to seize on these two sectors to bring this market lower. Technology stocks have had some great earnings by the biggest of the big in Goog, Aapl, Amzn, Msft, Bucy, Cree and Nflx. The bears will struggle to get any sustained down side action in these issues thus they'll have to find it elsewhere. The financial stocks are more vulnerable and if they break, the technology stocks will at least get dragged down to some degree. It looks as if the financial's will have to lead. Gs and Wfc were not well received on their reports but Jpm and Ms were. All of this tells me that yes, we can break down some to unwind those poor divergences and overbought conditions, but the likelihood of a market free fall are remote at best. Can we fall to Dow 9500 or so? Yes. Is it possible to just crash out as many bears suggest? I'd say no for now. That could come next year but extremely unlikely for the rest of this year. So many the bears can get this down 5-7% or so but I don't think any more than that.
Sentiment continues to baffle me. We are not seeing a major ramp in bullishness anywhere. Survey after reliable survey shows a continued cautious eye by the majority of players and advisors. We do have more bulls than bears in most cases but not close to a percentage that throws up the red flag that says we are dangerously complacent. We are not seeing a high number of calls to puts either in the options world. Nowhere near levels of complacency. The put call ratio remains neutral throughout. Until we see a higher number of bulls than we're seeing now, sentiment is not an issue for the bulls. My guess is, should we pull back which is most likely over the next few weeks, we'll see a huge ramp is bearishness which helps the bullish case once the selling is over.
Reversals noted this week in many groups off our September Highs area in many key groups. We've included charts of both the Transports and Banks seen in our 5th and 6th charts below. Both reversed lower during the week and are currently testing our 50 EMA Supports. Next week these will need to be watched closely as if they give way that should put some pressure on the broad market. Due to weak earnings both the Rails and Trucking areas were under some heavy pressure. The Telecom and Software Sectors both reversed on volume during todays session and continue in rising wedge patterns.
On the positive side earnings this week were quite strong from the Internet area with AAPL/AMZN coming in with strong reports and being rewarded in the after market with strong moves. Most of the Commodities pulled in some late week even though Crude closed above the $80 area. The Dollar did firm up some late week putting some pressure on some of the Commodities.
The Week Ahead:
We look to this week for some resolution out of this annoying range, this annoying lateral action to nowhere. If the bears can close this below 1074 they are in business for the short term. I don't see the bulls taking out 1101 to the up side short term as the divergences are just too poor while also dealing with overbought oscillators that are now pointing down. It is likely we lose 1074 but remember, if we do, 1060 is next and that's only a little more than 1% below. By the time we get there, we will no longer be oversold. In fact, by then, the 60 minute charts will be very oversold thus expect a move back up to unwind. Not a big move but annoying enough if you're overly short this market. With all the gaps and trend lines along with critical moving average support not far below, don't expect the world even if break below 1074. Shorting will have to be done quiet carefully. Nothing will be easy here but short term I expect the bulls to struggle more than the bears. Let's see if the bears can take down 1074.